The Dairy Situation and Policy The Dairy Situation and Policy Responses in the United StatesResponses in the United States

Presented at an Agricultural Economics Presented at an Agricultural Economics WorkshopWorkshop

Brussels, September 29, 2009 Brussels, September 29, 2009

Daniel A. Sumner, Director University of California Agricultural Issues Center and

Professor Department of Agricultural and Resource Economics, UC Davis

All milk: nominal monthly price, January 2006-August 2009

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Dairy farmers in desperate straits

By Jerry Hirsch , May 29, 2009 LA Times

Falling prices are forcing many to sell their cows for meat. Some are threatening to dump milk into sewers. Two have committed suicide.

In California, the No. 1 dairy state, the pain is felt keenly.

“The California Milk Advisory Board continues to ply its "Happy Cows" advertising campaign, but there are few happy dairy farmers right now.

“Frustrated with low milk prices, dairy farmers are selling cows for hamburger meat and threatening to dump milk into sewers. Many are burning through their life savings hoping to survive the slump, and others are exiting the business.”

All milk: monthly real prices, Jan 1971 - Aug 2009

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All milk: monthly U.S. price, January 2006 - Aug 2009

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2006 2007

2008 2009

Not just the price of milk, but of course, productive cows must eat

Price ratio of milk to feed, Jan 2006 -Aug 2009(feed pounds that can be purchased per pound of milk)

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Price ratio of milk to feed, Jan 2006 -Aug 2009

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Dairy: monthly average number of U.S. milk cows (The low to high jump is about 2%)

9.1

9.15

9.2

9.25

9.3

9.35

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All milk: average daily U.S. production(About 4% growth, less than annual flux)

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Lots of cows, and from the farmer perspective, “too much milk”

All milk: average daily U.S. production, January 2006 - August 2009

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2008 2009

The export market, especially for skim milk powder, had in recent years become a source of significant demand for US milk and contributed to high prices.

With the global recession that market contracted.

Skim-fat dry milk powder: monthly U.S. exports, January 2006- July 2009

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Skim-fat dry milk powder: monthly U.S. export unit value,January 2006- July 2009

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Supply and demand illustration of recent prices and quantities

Government policy responsesPrice support increased

• The dairy industry has been quieter than vocal protesters for other causes, but have been able to raise the “price support” and the government is now acquiring cheese and skim milk powder after several years of no activity (purchases will be a few % of milk production in 2009).

• Purchase prices raised by around 15% for butter skim milk powder and cheese.

More government support

• Payments to producers (MILC) was triggered by low prices and will account for about 4% of dairy revenue in 2009.

• Additional purchases under school lunch and international food aid programs

• A small export subsidy program was reactivated

• None of the new activities are “large” and have done relatively little to stem the price declines.

• Stock accumulation and payments probably prolonged the supply demand pressure that keep market prices low

Coops Working Together (CWT): industry funded whole-herd cow slaughter program

• Program of periodic cow removal program run by the industry that gets funds from coops and pays farms to exit the industry and send cows for slaughter

• Removed 100K cows in spring of 2009 and another 90K cows this fall.

• But many of these cows would have exited anyway and the program surely delayed some exits as farms waited to be paid to go.

• Additional milk supply reduction and contribution to raising short run market prices is limited.

Under these programs some cows leave and more heifers enter production

Current Policy Ideas

• Government is pursuing legal cases against buyers (including dairy farmer cooperatives) charging use of market power to suppress farm prices

• This idea does not seem to fit the price patterns; buyers had power last year too when prices were high! Also, there is a lack of theory and evidence for how cooperatives suppress their own member prices.

• This may be simply a political distraction and is popular among the most vocal among farmers

Variable marketing quota program

• Use marketing quotas to manage supply, keep out new farms and limit allowed sales when prices decline

• But, the idea is to somehow do this without creating a EU or Canadian style system with capital value built into the quota

• Benefits the old and inefficient and makes the industry less dynamic

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Actual class III milk prices and futures prices

Is the short run crisis on the way to resolving itself. Seems likely that milk prices will continue to rise and feed prices will continue to decline and profits will return. At least until next time!